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Tuesday, January 7, 2014

Osofsky: Beyond Worst-First Tax Enforcement

Leigh Osofsky (Miami), Beyond Worst-First Tax Enforcement:

When enforcement resources are limited, how should the scarce enforcement resources be allocated to maximize compliance with the law? The answer to this question can determine to what extent the law on the books translates to the law in practice. A dominant school of thought in the tax literature suggests that they should be allocated based on a “worst-first” method, whereby the individuals likely to be most noncompliant are targeted. However, “worst-first” methods suffer some underappreciated weaknesses. While “worst-first” methods can encourage all individuals to increase compliance so as not to be deemed the “worst,” they can also provide cover to engage in noncompliance that is perceived moderate for the relevant population. This dynamic can become most problematic in highly noncompliant populations. In such populations, existing, high levels of noncompliance, and underlying, structural causes of the high noncompliance can serve as coordinating mechanisms, providing mutual assurance of low compliance. Moreover, “worst-first” theories do not provide a comprehensive explanation for the group and project-based enforcement practices that are found in a number of actual enforcement settings. In response to these deficits in existing theory, I draw on work from across different disciplines to develop a new layer of analysis regarding the allocation of scarce tax enforcement resources. I suggest that, under certain conditions, deterrence can be enhanced by allocating scarce enforcement resources among a low-compliance population of taxpayers through a process I call microdeterrence. After setting forth the theoretical case for microdeterrence, I examine how it might apply in the cash business tax sector, a setting that presents particular challenges for “worst-first” methods. I conclude that microdeterrence may increase compliance, meriting its application and empirical evaluation. More fundamentally, this Article underscores the importance of the allocation of scarce enforcement resources, some of the deficits in existing theory, and the potential benefits of integrating additional layers of analysis.

http://taxprof.typepad.com/taxprof_blog/2014/01/osofsky.html

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